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This past year has brought with it significant improvements to the wounded market we all lived through last year. With this healing process, the world of a seller became an ease as the constraints of limited inventory, low prices, and low mortgage rates all converged. Slowly listing prices began to rise and now, mortgage rates are following suit. “There’s no one in the business right now who doesn’t think the market hasn’t taken a step back. The evidence is all around us,” said Glenn Kelman, chief executive of real-estate brokerage Redfin. (SOURCE) A good rule to follow is that 1% increase in mortgage rates will equate to a 10% reduction in affordability or purchasing power a buyer has. The most recent leaps in rates have made homes just about 10% more expensive to buyers who need to finance their purchase.

First, you must remember, even at 5%, rates are still low and homes are still affordable when you look at historical standards. With that being said, this is a stock to the buyer’s side of the market. Buyers oftentimes shop for a home based upon their monthly mortgage payment which does mean they will be looking at a slightly lower price range for their purchase—but at this point, the market feels they buyers are still actively looking so be sure if you are on the fence, you get your house on the market!

It is all about balance. The market that will take the biggest hit is most likely to be the high end of the market. Oh the other side of the spectrum, the market that will perhaps most benefit from this new market environment would be that of the real estate investors. Investors who have been taking advantage of the low rates and buying properties to rent will see the influx of renters come back to the market as they see their buying potential dwindle. Because of both these factors, home inventory will finally catch up to the demand and the market will stabilize so that both buyer and seller alike are entering a more stabilized marketplace.

The hit to home prices is still out there in the future and has not happened yet. It is more of a shockwave impact where the news hit, sellers and buyers have time adjust and react and then the market adjustments happen. Here in Montana we get an even bigger buffer zone because we are always a few months behind the national trends. If you are looking to buy or sell right now, the market is still in a very advantageous place for you. In fact, pending home sales are reaching new highs.

“The number of pending home sales seen through the end of May increased 6.7 percent from April and 12.1 percent on an annual basis, bringing the current level seen nationwide to its highest point since December 2006, just prior to the start of the housing meltdown beginning in earnest, according to the latest Pending Home Sales Index from the National Association of Realtors.” (SOURCE)

“Prices are increasing quickly, though that may not always be the most healthy development for the economy. Also, banks may soon loosen overly strict requirements, but a choke point remains in new-home construction.”(source)

“The median home price jumped 8% from the previous month to $208,000, according to NAR. While month-to-month price swings are not unusual, the year-over-year rise is now 15%, and prices are at levels last seen in the summer of 2008, just before the bursting of the housing bubble.” (source)

The housing recovery is in full swing. The surge in themarket caught many by surprise with how fast and how swiftly demand for new homes and the selling of homes happened. There are still too many buyers seeking to buy in a market with too few homes for sale. For most, all this news is vibrant and wonderful.

There is always caution that must be mixed into the equation when it comes to the real estate market.

Although fast-rising home values are great for home owners, price increases that go beyond the growth of income create a weak point within the economy that will have to balance itself out eventually.

The potential loosening of underwriting restrictions will normalize the lending environment but this too will contribute to a faster price growth. Making it easier for buyers to buy will only put stress on the already limited inventory on the market.

New-home construction breached the 1 million mark for the first time in five years in March. Currently, 1.5 million new housing units are needed annually to keep pace with the price gains to keep the market stable and healthy.

All of these currently optimistic headlines the real estate world is seeing are all red flags in and of themselves as well. The market is amorphous unit and will adjust to re-balance itself in time. Too fast of a recover can potentially mean an equally fast decline when the market constricts. One eye on the present and one eye on the future.